Editor’s note: NetApp (Nasdaq: NTAP), which operates a larger corporate campus in Research Triangle Park and is committed to expanding it, reports a drop in revenue for its most recent quarter. The storage technology firm is battling industry moves to “cloud” computing and hardware commoditization, writes Stephen Belanger of Technology Business Research.

HAMPTON, N.H. – NetApp’s realignments to address emerging trends such as cloud and big data did not come fast enough to stem declining revenue.

In 2Q14, NetApp’s revenue decreased slightly by 1.8% year-to-year to $1.49 billion, which was at the upper end of the vendor’s revenue guidance of $1.42 – $1.52 billion. TBR attributes the decline to NetApp’s ongoing challenge of adapting quickly to market trends such as increasing cloud adoption and storage hardware commoditization. NetApp also faced intense competition from large-scale vendors such as EMC, its key competitor, as well as increasing competition from smaller vendors and startups are such as Nimble Storage, Tintri and Violin Memory.

To address these challenges and drive revenue improvement, NetApp will continue to strengthen its technological capabilities, led by its core ONTAP storage operating system. Additionally, the vendor is embracing cloud and big data-driven disruption in the storage market through both portfolio investments and partnerships to expand its addressable market and remain competitive.

Product line enhancements in areas such as Clustered ONTAP, EF flash arrays and OnCommand data management software will help NetApp compete for new customers and retain its existing customer base in the highly competitive storage marketplace into 2015.

  • Loss of a key partner cuts NetApp OEM revenue; NetApp refocuses on branded offerings for new revenue opportunities

In May, IBM announced its decision to stop selling NetApp’s storage hardware, ending the vendors’ OEM agreement. Prior to this announcement, NetApp’s OEM revenue, which was heavily dependent on IBM, was already declining. IBM’s decision to focus on its own branded storage hardware was a key contributor to continued OEM business challenges for NetApp in 2Q14, as its own OEM revenue declined 22.7% year-to-year to $128.7 million (8.6% of revenue). NetApp forecasts that its OEM business will decline up to 40% year-to-year in FY2015, ending in April 2015.

Going forward, TBR believes NetApp will focus product investments on its branded offerings, which will increasingly contribute to total revenue. Armed with a revamped product line with recent launches such as the clustered ONTAP storage OS and the EF flash array series, NetApp is positioning to drive sales of its branded storage solutions.

In 2Q14, NetApp achieved year-to-year branded revenue growth of 0.8% to $1.36 billion. Branded offerings accounted for 91.4% of total sales, up from 89% in the year ago quarter. TBR anticipates mid-single digit branded storage revenue growth through FY2015, helping to offset OEM revenue declines.

  • New partnerships will help NetApp remain relevant by bringing NetApp storage into more cloud deployments

In July, NetApp announced partnerships with Microsoft and Equinix to strengthen its hybrid cloud capabilities. The vendor’s partnership with Microsoft created NetApp Private Storage (NPS) for Microsoft Azure, which enables customers to create hybrid cloud environments with on-premises NetApp storage systems and cloud resources from Microsoft’s Azure public cloud infrastructure. NPS for Microsoft Azure will support sales of NetApp’s storage hardware as cloud adoption continues at a rapid pace.

TBR expects the vendor’s revenue will benefit from expanded relationships with existing private cloud customers, as well as Microsoft Azure customers that transition from purely public cloud solutions to hybrid cloud infrastructures.

NetApp also announced a partnership with Equinix in 2Q14, which makes Equinix the first data center colocation facility to enable Microsoft Azure ExpressRoute links with NetApp private clouds. The Equinix Cloud Exchange is capable of connecting NetApp private cloud customers to multiple public clouds. TBR believes the Equinix partnership will help NetApp reduce the long-term threat of public cloud service providers to its storage hardware business.

TBR believes NetApp is taking the right steps to adapt to the disruptive cloud trends by working closely with cloud partners and embracing hybrid cloud solutions, positioning the vendor for future success as cloud computing adoption continues to grow.

(C) Technology Business Research